The family law sector is abuzz with talk about the newest High Court of Australia decision which delves into Part VIIA of the Family Law Act 1975 and examines the requirements for valid Binding Financial Agreements.
You can make a binding agreement about your financial arrangements in case of a relationship breakdown.
The legal term is “Binding Financial Agreement” (“BFA”) however some people call them "Pre-nups".
A BFA can be made before, during or after a de facto relationship or marriage.
The decision, which was handed down on 8 November 2017, has been simply dubbed by the family law community as “the Binding Financial Agreement case”.
What does this case mean for you?
The High Court judgement highlights that in certain circumstances Binding Financial Agreements may not be binding.
If a party to a agreement engages in conduct that is (in all the circumstances) unconscionable, the Court will not uphold the agreement.
This does not mean that all Financial Agreements are not binding and it certainly does not mean that you should avoid seeking legal advice about Binding Financial Agreements.
You must provide detailed and candid instructions to ensure that appropriate legal advice can be given.
If you a considering a Binding Financial Agreements, please contact our Family Law team for confidential advice.
The Case - Thorne v. Kennedy
The parties met on an online dating site in early to mid-2006.
The Wife (Thorne) was Eastern European with little to her name. The Husband (Kennedy) was a Greek Australian businessman worth approximately 24 million.
The parties courted briefly after meeting, the Wife was brought to Australia to live, and a wedding date was set for 30 September 2007.
The Wife was aware that “documents” would be signed before the wedding and that the Husband wanted his children to inherit his wealth.
By 19 September 2007, the Wife understood that the Husband had arranged for a Binding Financial Agreement to be drafted by his lawyers. The Wife was told that if she did not sign the Agreement the wedding would not go ahead.
At this stage, the reception centre had been booked and guests had been invited. The Wife’s dress had been made and her mother and sister had been flown in from Eastern Europe and were awaiting the impending nuptials in accommodation paid for by the Husband.
The parties entered a Binding Financial Agreement on 26 September 2007 and were married on 30 September 2007. A second Binding Financial Agreement was signed on 5 November 2007.
The parties separated on 16 June 2011 and proceedings were initiated by the Wife in 2012.
The Husband died in May 2014 during the initial trial proceedings and the executors and trustees of his estate continued the proceedings on behalf of the Husband’s estate.
The First Agreement
The Binding Financial Agreement consisted of provisions for the Wife during and after the marriage and in the event that she was predeceased by the Husband. The Agreement also contained a condition that a second Binding Financial Agreement was to be executed after the parties’ marriage.
As required by the Family Law Act 1975, the Wife obtained independent legal advice about the Agreement.
An accredited family law solicitor assisted with several minor amendments to the Agreement and gave the following advice to the Wife:
The maintenance to be provided during the marriage was poor;
The payment the Wife would receive if the parties separated after three years was “piteously small”;
The Agreement “no way considered [the Wife’s] interests”; and
The Agreement was the “worst agreement” the solicitor had seen and was “entirely inappropriate”.
Ultimately, the Wife was advised not to enter the Agreement.
Despite the legal advice she receive, the Wife signed the Agreement on 26 September 2007.
The Second Agreement
The second Binding Financial Agreement was “substantially identical” to the first.
On 5 November 2007, the Wife again obtained independent legal advice and was again advised not to sign the Agreement.
The Wife signed the Agreement the same day she received the independent legal advice.
Requirements for a Binding Financial Agreement
Under Section 90G the Family Law Act 1975, a Binding Financial Agreement will be binding on the parties if:
The agreement is signed by all parties;
Before signing the agreement, each party obtained independent legal advice about the effect of the agreement on their rights and the advantages and disadvantages of the agreement;
Each party obtains a statement by a legal practitioner stating that the independent legal advice was obtained and provides the other party with a copy of the statement;
The agreement has not been terminated and has not been set aside by a Court.
The Court has the power to set aside a financial agreement in certain circumstances, which includes if a party to the agreement engaged in conduct that was, in all the circumstances, unconscionable.
In deciding whether “unconscionable conduct” occurred, the Court must give consideration to the principles of common law and equity that are applied to determining the enforceability and validity of contracts pursuant to Section 90KA of the Family Law Act 1975.
The Trial Judgement
The Trial Judge was satisfied that the Wife’s English was “sufficient” to understand the Agreement and her solicitor’s advice. The solicitor’s advice was not criticised.
The Judge held that “every bargaining chip and every power was in [the Husband’s] hands”; there was no option for the Wife but to sign the Agreement. This, as summarised by the High Court, was due to:
Her lack of financial equality with [the Husband];
Her lack of permanent status in Australia at the time;
Her reliance on [the Husband] for all things;
Her emotional connectedness to their relationship and the prospect of motherhood;
Her emotional preparation for marriage;
The “publicness” of her upcoming marriage.
Further, the judge found that the Wife could not contemplate a situation in which the marriage would end, but for the Husband’s death.
The Judge held that the first Agreement was signed under duress and that the second agreement was “simply a continuation of the first”; if the Wife did not sign the Agreement, the marriage would have ended.
The Trial Judge held that the Agreements were not binding on the parties and they were set aside.
The Full Court Judgment
The Husband’s estate appealed the Trial Judge’s decision to the Full Court of the Family Court of Australia.
The Full Court dismissed the argument that the Agreement was invalid due to duress, undue influence, or unconscionable conduct.
The Full Court held that the Trial Judge erred in finding that the Wife signed the agreement due to duress without clearly identifying the “weighing” of the six factors considered in the Trial Judge’s decision.
The Court also found that the Trial Judge had “applied the wrong legal test to the facts”. The Court explained that duress requires a threat or actual unlawful conduct; the “pressure” placed on one party must be an “illegitimate” or “unlawful” act by the other party.
The Court also accepted that the Husband made it clear to the Wife that “his wealth was his, and he intended it to go to his children”. The Husband had not made a misrepresentation to the Wife. He did not unduly influence the Wife.
The Full Court found that the Agreements were fair because the Wife knew the Husband’s intention at the outset of the relationship.
The Full Court allowed the Husband’s appeal.
The High Court Decision
The High Court clearly broke down the elements of unconscionability that applied to Thorne and Kennedy.
The Court found that the Trial Judge had used “duress” and “undue influence” interchangeably. For this reason, the High Court did not examine the elements of duress in line with this case.
In relation to undue influence, the Court recognised certain relationships in which a presumption of undue influence applies, for example, parent and child, trustee and beneficiary, solicitor and client. The commonality in all cases is that one party is “substantially subordinate” to the other. The Court was adamant that a fiancé and fiancée relationship does not automatically fit into this category. The Court recognised that undue influence occurs when there is an absence of free will in the decision making of a party to an agreement.
On the other hand, unconscionable conduct requires a “special disadvantage” by one party which results in decision making that is not in his or her “best interests”. The other party must “unconscientiously” take advantage of by the disadvantaged party for unconscionable conduct to occur.
The Court examined the facts of the case and agreed with the determination of the Trial Judge. The Full Court’s assessments were rejected as:
The Trial Judge had completed a comprehensive review of the facts of the case and had looked at every connected circumstance when reaching judgement. The reasons for judgement were not inadequate;
The Wife was “powerless” and in a situation where pressure, created by the Husband, caused her to be in a position where her free will was “substantially subordinate”. The Wife was subject to undue influence.
The High Court set aside the decision of the Full Court and provided the following guidelines for consideration in the context of Binding Financial Agreements:
Whether the agreement was offered on a basis that it was not subject to negotiation;
The emotional circumstances in which the agreement was entered including any explicit or implicit threat to end a marriage or to end an engagement;
Whether there was any time for careful reflection;
The nature of the parties’ relationship;
The relative financial positions of the parties;
The independent advice that was received and whether there was time to reflect on that advice.